You could run into the ugly hobby loss rule if you have an activity that creates a tax loss.

Why “ugly”? Because you could lose all your deductions and pay taxes on the income.

Example. Your activity income is $200,000, and expenses are $350,000. If the hobby loss rules apply, you could pay taxes on $200,000 of income.

Think of it:

You lost $150,000 on the hobby—cash out of pocket ($350,000 - $200,000).

And now, because of the rules, you pay taxes on $200,000 of income.

Yep, that’s ugly.

Know this. The ugly ... Log in to view full article.